The Solar Industry is Red Hot – Will it Get Hotter?

The solar industry has been very hot. Record amounts of new solar capacity have been installed over the past two years. The accelerating pace of adoption of solar panels for distributed generation (installed at the point of use, rather than sold into the power grid) and the downward trend of module prices have created exuberance over the industry’s future.

It is clear that the future is very bright for the industry. What is less clear is when growth will accelerate and how near-term challenges for the industry could create some rough patches for the industry before widespread adoption drives truly explosive industry growth.

The rapidly decreasing costs of solar cells and corresponding growth of the global solar industry have lead people to invoke Moore’s law and predict that the installed capacity of solar PV on homes and businesses will double every two years. The total installed capacity worldwide and in the U.S. doubled over the last two and a half years. While the steep decline in the cost of manufacturing solar panels appears to be flattening out, the associated balance of system costs, along with customer acquisition, transaction and capital costs will continue to drop, though this will likely happen inconsistently in fits and starts over coming years. Meanwhile, the per-unit cost of retail electricity delivered by utilities will begin to rise as costly infrastructure demands combine with stagnating or falling demand caused by the penetration of distributed power systems. These two merging dynamics – dropping solar costs and rising utility rates for electricity have caught the eye of more than a few investors and analysts.

The opportunity is immense

Solar is still a relatively immature industry. About 0.2% of electricity in the U.S. comes from solar generation and solar has been installed on less than 250,000 homes in the U.S. If a building or structure receives direct sunlight and uses electricity solar could be used to generate some of that electricity. The residential market potential is immense: there are more than 90 million single family homes in the U.S. and as many as 50 million more households in multi-family structures and several million more commercial and other non-residential structures. While solar may not work on every structure in the U.S. just a small wedge of this market is worth hundreds of billions of dollars.

In some markets it is already cheaper for a household to invest in solar than to buy electricity, and the projection is that at a $3 per watt for the cost of installed solar, about 100 GW could be economically installed today without relying on any state or federal subsidy programs. As the market closes on that $3 per watt threshold, the rate of growth will almost certainly explode. Manufacturing capacity, capital and a skilled labor force will be the only constraints on growth.

Some possible bumps ahead?

The future isn’t all sunshine and excitement – subsidy erosion, attacks from utilities, a slowing of the price reductions of solar panels, an uncertain market for utility scale projects due to low wholesale power prices, and structural market challenges like a lack of adequate and low cost capital are all possible challenges to the near-term success of the solar industry.

Both federal incentives and local support like net metering are at risk of being scaled back. The federal Investment Tax Credit is set to decrease from 30% to 10% if not extended by December 31, 2016. State-level renewable portfolio standards, or regulations that incentivize or require utilities to purchase renewable power or solar specifically, also have an unpredictable future. These portfolio standards are threatened by policy instability, driven by some utilities, but more seriously by conservative political groups like the American Legislative Exchange Council and Heritage Foundation, which are actively campaigning (though unsuccessfully so far) to roll back these programs.

Net metering policies that allow households and businesses with solar to sell their surplus power back to the grid are another important economic program for solar growth, as solar output does not necessarily match energy demand (getting value for electricity generated but not used on site is typically vital for project economics to work). Utilities have made targeted efforts to limit or reverse net metering requirements, arguing that these programs increase their cost of managing the grid, and that the additional costs for solar connections are borne by consumers that have not installed solar. Several utility executives have also begun to acknowledge that distributed energy sources like solar pose a direct threat to the utility business model.

This growing conflict, across state and local policy supports will only add to uncertainty around the stability of the programs that solar depends upon for growth in the near-term. Additionally, as we have seen in markets like with New Jersey SRECs, market dynamics can also erode portfolio standard values and undermine a program’s stability. Uncertainty with respect to program value has two related effects: 1) direct reduction of program value is a drag on project economics, and 2) the inability to obtain loans or investments because investors and lenders will discount the revenue associated with an uncertain program.

This pool of incentives is vital for distributed solar’s immediate future in that they provide the bridge between the price per unit of electricity from on-site solar generation and the delivered cost of power from a utility.

As noted above, the downward trend in panel pricing appears to have slowed. Investment in solar PV production and manufacturing fell by 72% from 2011 to 2012, mostly because of market overcapacity. Despite some recovery (investment is expected to rise by 30% by the end of this year) there is simply less excess panel supply to force down prices in the near-term. While advances in the economic efficiency of other pieces of the full stack of solar system costs – transactional, installation, non-panel components, customer acquisition – will continue to decline, these have historically represented a much smaller portion of the overall drop in the price of solar, and the price declines will be less linear than the decline in panel prices have been.

The utility-scale market will drive a smaller portion of growth than it has for past few years. The third quarter of 2013 saw a decrease in utility-scale solar installations to the lowest level in the past six quarters. Wholesale electricity prices remain low in many markets (islands or any market using diesel fired electric generation are an obvious and important exception), and with fewer mandated pricing premiums from utilities there are fewer opportunities to build economically viable utility scale solar projects.

Additionally, the demand for capital against the rapid pace of growth is a constraint that may not resolve in the near term. The pool of investors and associated available capital that has experience with solar finance remains limited – critically so for tax equity investors – and new market entrants face at least a significant educational barrier to entry. The downstream market for installation and ownership is still very fragmented, and without more players that can draw investments in the hundreds of millions to multiple-billions of dollars range into the solar market, the appetite of large institutional investors, which drive most large-scale infrastructure investment in developed markets, will be limited.

The confluence of these three near-term challenges creates the potential for some mild disruption to the still nascent marketplace. So a market evolution that looks like this:

rather than this:

Is a possibility that needs to be factored into planning for anyone participating in the solar industry.

An aggressive, dynamic, and visionary strategy put in place today will define who wins the solar race

The longer-term future of the solar industry, and especially the future of distributed solar PV, is exciting and the economic potential is simply immense. The industry will certainly go through a period of exponential growth. The solar skepticism that grew out of anti-solar campaigning follow the failure of Solyndra is now a distant memory for most of the industry and increasingly more investors.

Despite this well-founded enthusiasm, there are real near-term concerns that could slow the pace of the industry’s expansion until deploying distributed solar costs less than the utilities’ per-unit cost of power delivery with a high enough level of certainty to attract many more investors than are already invested in solar projects. Actual policy instability and the associated perceived risks could create real limits in the pace of solar’s growth.

As the industry moves forward it will be vital to have vision and strategy – investors and businesses that entered the market early and have survived the challenges so far already understand this. As new market participants look to the huge potential of solar they too must make sure they have the vision, knowledge and flexibility to navigate some potential near-term bumps in order to win a commanding share of the industry’s tremendous future.

Special thanks to Claire Austin, a very smart young clean energy professional, and 2012 graduate of the School of Foreign Service at Georgetown University, who was instrumental in the research and writing of this piece.

By Shiggity on October 22, 2013 at 12:21 pm

Well SolarCity is on pace to have over 1GW of generating capacity of solar PV by 2015. By 2025 they could be one of the biggest utilities in the United States, distributed through every state, selling solar one rooftop at a time. At a certain point it starts snowballing when you have profits from older solar PV allowing you to build out even more solar PV. Amoritized solar PV is basically free money.

I am probably one of the most outspoken pro supporters of solar, wind, geothermal, hydro, hydro-kinetic and all things renewables. However, as someone who worked in the nuclear power and public utility sector for 25+ years I have this empty feeling in my stomach that we are just not going to get it done. I have this gut feeling that most of us don’t really have a very good concept of the amount of power needed in America. Here is just one tiny little example of just one tiny little segment of our grid.

Today in California the Western ISO grid will peak at about 30,900 MW. Current demand @ about 10:28 a. m. is about 27,518 MW. SOLAR is making up [2,500 MW] a very small but important part of 3855 MW of the overall renewable supply. It will probably not grow to more than about 5,000 MW at peak production.

Now lets put this in perspective. One nuclear power plant is usually about 1000 MW. Renewables in California are currently replacing the electricity generated by about 3 typical nuclear power plants [when the sun shines and wind blows that is, ha ha.]. The point I am trying to make is that we haven’t even touched the surface of the amount of power needed and yet California is viewed as a leader in solar or renewable energy. That projected peak of 30,911 MW is for a very mild fall day. In the summertime peak demand can easily exceed 45,000 MW. And where does that 45,000 MW come from? Mostly from coal and natural gas plants and some smaller percentage of renewables in the form of solar, wind, geothermal, biomass, biogas, and small hydro. California imports electricity from Arizona, Nevada, Oregon, Washington State, Utah and other neighboring states and while SOME of it is renewable not all of it is by a long shot.

Here is a link to the ISO Grid for today. Browse the website and get a good idea of what is going on.

So we have 3855 MW of renewables at work today when what we need is 10 times that amount. I think we have started patting ourselves on our backs WAY too early. We could install another 20,000 MW of solar, wind, hydro-kinetic, geothermal and still not exceed peak demand on just the California grid and we haven’t even talked about other grids in America which have a much larger percent of coal use for example.

So how many solar panels do we need to build and install to get to lets say a reasonable number like 20,000 MW? If each solar panel is 250 Watt DC capacity or provides about 200 Watts AC considering losses; how many do we need to install to get to 20,000 MW?

As you can see while I support renewable energy of all types it is going to take a massive effort on our part to make any kind of dent in things like Global Warming or Climate Change [GWCC] or CO2 reductions which may or may not be in your belief system. If we continue the current manufacturing and installation schedules we have seen in the past AND maintain the proposed FUTURE schedule; I just don’t see us getting from point “A” to point “B” in some reasonable time period. Now that you know; what do you think?

Some people are going to make/share trillions of dollars in the renewable the energy business which of course includes things like electric vehicles and energy storage. If I were of an age where a career decision was necessary – guess where I would be looking?

Tom, I’ve been around energy issues, analysis, etc. for over 35 years and pretty much agree with everything you’ve written above. No matter what Amory Lovins (who I worked with in the early years) writes and talks about, there’s a long way to go before renewables (combined with efficiency) replace fossil fuels. Vaclav Smil wrote one of the best short papers on this (two pages) back in 2006 in the OECD Observer.

Also, thanks for the link to CA_ISO. I’m in Maine and we’re part of ISO_NE and here’s what their “dashboard” looks like. More emphasis on price (LMP=Locational Marginal Price), but if you scroll down there’s forecast and actual demand. Can click on Renewables above pie chart to see that mix. Almost always mostly wood and refuse.So far, very little solar in New England.

Thanks tom. This is a useful reply and a point I constantly try to make on the guardian comment if free section. Having a load of renewable wind and solar in the UK will still only account for 10% of the energy needs in the UK.

Thank you for putting everything in perspective. I don’t think California ever said that solar and only solar will be the answer for the future.

We need every type of renewable over large geographic areas and nuclear energy, more flexible power plants, storage where economical, demand side integration, and energy market restructuring.

California ISO and the CPUC are trying to push for an energy imbalance market, creating ramping as a ancillary service, created a storage mandate for utilities, and are work on efficiency and demand side integration.

Attacks from utilities? Solar panels are analogous to a switch that turns off your neighbor’s power when the sun is shining brightly. The utility can’t charge you for power you don’t use, which is no big deal because they are not burning any fuel for you …in theory. But somebody has to pay for the grid that distributes your solar to your neighbors. Utilities will eventually have to charge solar panel owners rent, not as an attack, but because they provide an essential service that makes solar more viable.

I can’t speak for any other part of Arizona or the utilities that might service those areas; but my utility UniSource Energy is already authorized and does charge me several fees related to grid maintenance and offsets for individuals using renewable energy systems . One grid fee is called a “Delivery Services” charge which last month cost me $18.67 on a total bill of $109.78 [fee varies by kWh use] That is on top of another fee called “Green Energy Charges” which includes two components which are “Renewable Energy Standard tariff” and “DSM Surcharge”. Those two fees added up to an additional $9.24.

While my utility UniSource Energy appears to be giving full support to renewable energy in my specific community since solar is going up everywhere here; other utilities like APS serving the Phoenix area appears to be fighting renewables.

Maybe someone else living in the APS service area can add some additional insights.

Both of your linked articles are very good. Every election cycle we vote for members of what we call our Corporation Commission. Over the years many of the individuals on that commission have stated they are members of the Republican party but also state they are pro solar. Not every Republican in Arizona is against solar power, LOL. Solar is big business in Arizona.

It is my belief that after all of the noise has settled; the Corporation Commission will arrive at what will be considered a good Net Metering plan/model. The Corporation Commission will negotiate with APS to lower the “buy back” price down to a couple of cents below the market rate so APS can make a small profit from the excess power. The only question in my mind is what those couple of cents will be based on. Will it be based on the variable rate or the lowest rate? APS is a variable rate power producer so the difference could be significant. To me it would seem fair to base the “buy” rate on the variable rate but who knows what will happen. I broke my crystal ball last week and so all of this is just a guess.

This change will of course have very little effect on an individual homeowner who for instance install a 7 kWh system to cover 90-100% of their energy needs and therefore the “buy back” provision would not even be applicable. It WILL however affect individuals who install a 10 kWh systems when all they really need is that 7 kWh system. This will of course also affect the marketing strategy of some companies.

I also need to mention that APS is not my utility. My electric provider is called UniSource Energy Services [UES] which covers most of the Western part of the state. The UES rate structure is based on flat rates unless the customer wants a variable rate plan to take advantage of something like Electric Vehicle charging. So whatever the Corporation Commission decides it could affect ME and I am listening, LOL.

Actually I think that the solar industry right now is over heated. Firstly most of the price decreases in the last 5 years have not come from technological gains but from margin reduction and government support. These support efforts are starting to drop off in various parts and margin reduction only takes away from the ability to gain in technology.

Solar power is useful when the sun shines but how do you store that energy?

Some people claim that you can use solar energy to make hydrogen & use that to store solar when the sun isn’t shining but doesn’t hydrogen need to be compressed & kept very very cold & wouldn’t that use too much energy?

How will renewables work when we can no longer afford to extract the oil that is used to mine the materials, manufacture renewable systems & maintain them?

Some major oil companies are already pulling out of fracking because it costs too much & they can’t recover their costs because the price of oil is too low, in the meantime, conventional oil peaked in 2005 & is now in decline but by tossing in natural gas liquids, the EIA has puffed up the “production” of oil to make it appear that oil “production” is still growing, but these natural gas liquids are too light to be used as transportation fuel.

You asked two very good questions. First “how do you store that energy” and second; “aren’t we still up a creek…?.

Here are my two very short answers. The first is; we currently don’t store solar energy except in cases where people have some type of off grid battery storage system which is quite expensive, and;

Yes we might be heading down the creek without a paddle unless we make some significant changes in the way our society consumes energy.

The long answer to both of your questions is much too long for posting here but I will try a MEDIUM long answer o.k. LOL. I might recommend you start by reading and studying my below posting I wrote 5 months ago and has this link in it.

Basically what this link tries to show is that at different times of the day you may or may not be using all of the power of some solar system you might install. Energy supply and consumption is a constantly moving target for both a homeowner and a utility.

For example, if both you and your significant other were at work during the day then maybe most of the power from your proposed solar system might be sent back to your UTILITY through your grid tied system and could be used later by yourself (see note 1). If however one or more of you were at home, cooking, working in the shop, etc, then possibly all of the power from your proposed solar system might just be used WITHIN your home.

Note 1. The term “stored” is really an incorrect term but is frequently used for simplicity. Public utilities [multiple generating sources] do not store electrical energy; they just generate more or less as needed to meet the needs of the grid. Some utilities do however store small amounts of energy in the form of pumped water storage and even things like compressed air, storage but it is very limited at the moment. We are probably 7-15 years away from large scale electrical storage systems.

So the first step in deciding on how much solar to install on YOUR HOME would be to determine how many kilowatt hours [kWh] of electricity you use every YEAR. Step two would then be to look for any ways to cost effectively REDUCE your CURRENT demand as much as possible. Things like more insulation, better windows, more efficient appliance, automatic setback thermostats and etc. Step three would then be to make those improvements. Only THEN would you be in a position to CALCULATE the number of kWh you want your solar system to produce. This will most likely be some value YOU decide you want to reduce your electric bill. Do you want to reduce your electric bill by 50%, 75% or 100%. That very personal decision is up to you the homeowner and will have a big impact on the cost of your system.

In summary, I recommend you do not install a solar system which exceeds 100% of your energy consumption. Maybe something on the order of 75% might be a better target. Most families will continue to find ways to cut energy consumption when it becomes a priority for them. And that dear sir leads me to my final thought which deals with your paddle question.

Having your own solar PV system to generate at least part of your energy needs is an excellent FIRST step in keeping both your boat and your paddle in good shape, LOL.

I live on the Oregon coast where we usually get little sun but lots of rain & fog. I’m retired & don’t have the $ to install a solar system & we just don’t have very much sun here. Everything runs on electricity but I do have a wood stove, my thermostat on my heat pump is at 65° in the daytime & 60° at night & I bundle up well at night. my cooling won’t go on until it’s over 80° & since I live alone, I can run about naked. :^)
Most of our electricity is from the Bonneville dam & Hansom nuclear reactors. The only solar panel system here I know of is at our Coos-curry electric co-op, a local utility company in Brookings OR. near the CA border.

I use compact florescent light bulbs, drive a small 1991 Honda CRX that still gets 30mpg & I drive as little as possible & combine my trips.

Even though we could be a lot more efficient in using energy our main problem is overpopulation. Oil & natural gas is in decline, the fracking boom is starting to go POP. Oil is used to grow our food, provide herbicides & pesticides & chemical fertilizers is made from natural gas.

We won’t be able to feed 7.2 billion humans much longer & who want’s to have lights on if their starving?
Solar & wind turbines are all made using OIL so how can we maintain those systems when oil becomes too expensive to extract which is why the oil majors are pulling out of fracking. If the price of oil rises high enough, I expect they will return but currently, it’s costing them dearly.
I don’t know if those who do have solar systems here can link into the co-ops service. I’ll have to do some research on that.

Our most critical problem isn’t just energy, raw materials, water “shortages” it’s OVERPOPULATION that is our most critical problem.
If we refuse to or can’t stop population growth & reduce our numbers to what can be sustained without fossil resources, we are toast!

All the renewables on the planet can’t feed 7.2+ Billion humans & mother nature will do the ugly reduction.

Well it certainly sounds like you are doing a lot of the “right stuff” when it comes to energy conservation. Are you in an area that gets nice offshore winds/breezes? That might be a possible alternative to solar? If not just keep on doing what you have been doing. When an appliance breaks try and buy the most efficient replacement you can afford.

About population. It is a subject almost no one talks about. Instead we celebrate on the news things like women having 4 and 5 kids instead of having only 2. Some countries are doing well and other no so much, LOL. The U.;S. birthrate is below 2 and has been that way for many years.

Good subject for you to talk about when that subject comes up. Until then have a great week.

We don’t get much wind except in the winter, our electric supply is mainly from hydroelectric. The birthrate of americans may be low but that’s off set by our huge, uncontrolled immigration.

This stupid corporate controlled government keeps giving amnesty to illegal immigrants & allowing them benefits that only legal immigrants should get.

California,Nevada, Texas & New Mexico are much better situated for solar power than we are on the coast.

It looks like the utilities in Arizona are doing their best to kill solar power connected to the grid with their endless fees that’s very short sighted of them. In any case, Arizona is mostly desert & the cities are unsustainable for lack of water. The over used Colorado river doesn’t even reach the Gulf of california anymore, it’s sucked dry before it gets there.

According to NASA, we are doomed to collapse in about 15 years. The reasons are many but I’ll not get into that here.

As you say, we have no economical way to store electric power, and if we did the ability to do so would magically make the grid efficient even in present condition. It’s very difficult and inefficient to balance large swings in demands and production of power. Making an intelligent grid is very complicated as compared to more efficient controls within a household or business to economize and balance use of power. Power companies are upset with being forced to purchase roof top solar power. At least the companies that aren’t attempting PR, as they can’t control or easily predict the energy production. There is no contract to sign in which to guarantee power supply, just force of government regulations to make it happen. The ability of home solar to offset kwh on one to one basis isn’t fair either. Meaning the ability to consume peak demand power and offset with low demand power. Some states regulate power companies to compensate solar with retail price of power vs the low price of wholesale uncontrollable power. Solar and wind enjoy a sweet deal, that will drive up the cost of electricity, but in the process will improve the false economies of solar and wind. Having said that, I like solar and wind power, just we haven’t developed and efficient way to utilize the power. Something like high temperature electrolysis of water to H2 and fuel cells may become a path?
Stashgal describes a problem or solution per my required “Man and Environment” class in college. We came to class a bright eyed and bushy tailed ready to solve environmental problems and left totally depressed. This prof would hear of no solution other than decreasing the excess population. But, he also told us we only had 20 years of oil left and now we have more reserves 20 years past the point where he stated emphatically we would be out. Population will ebb and flow per desire for parents to save money, less responsibility, higher standard of living, cost of child rearing, etc.. We currently need to encourage the healthy and wise to double fertility and stop paying for the poor to make more.

I normally encourage people to only install the amount of solar they need to reduce their electric bill to some value they are comfortable with.

I urge anyone who wants to install more solar than they need to investigate in a purchased power agreement or some other financial agreement with their local utility. Having an excess of solar as you stated makes it difficult for some utilities to manage their systems and stay within the bounds of their states regulatory environment.

The utility I once worked for took an entirely different approach and embraced the changes they saw coming and started about 4 new business ventures. They continue to support and install solar to this day.

Have a fun day. It’s cool and sunny here in Arizona today. Great day for making kWh.

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Elias Hinckley is a strategic advisor on energy finance and energy policy to investors, energy companies and governments. He is an energy and tax partner with the law firm Sullivan and Worcester where he helps his clients solve the challenges of a changing energy landscape by using his understanding of energy policy, regulation, and markets to quickly and creatively assemble successful energy deals.